Tuesday, December 16, 2008

Tax Planning Tip #1 - Use Your Home as a Tax-Saving Tool

You can deduct interest on up to a combined total of $1 million of mortgage debt incurred to purchase, build or improve your principal residence and a second residence. And you can deduct points related to a loan for purchasing or improving your principal residence. Also keep in mind these deductions and exclusions:

Property tax deduction. Before paying your bill early to accelerate the deduction into 2008, review your AMT situation.If you end up subject to the AMT, the prepayment will be for naught becauseyou’ll lose the deduction.

Home equity debt interest deduction. Interest on home equity debt used to improve your principal residence—plus interest on up to $100,000 of home equity debt used for any purpose—is deductible. So consider using home equity debt to pay off credit cards or auto loans, whose interest isn’t deductible. But beware of the AMT: If the home equity debt isn’t usedfor home improvements, the interest isn’t deductible for AMT purposes.

Rental income exclusion. If you rent allor a portion of your primary residence or second home for less than 15 days, you don’t have to report the income. But expenses associated with the rental aren’t deductible.

Home sale gain exclusion. When you sellyour principal residence, you can exclude up to $250,000 ($500,000 for joint filers)of gain if you meet certain tests. Losses aren’t deductible.

Because a second home is ineligible for the exclusion, consider converting it to rental use before selling. It will then be considered a business asset, and you may be able to defer tax on any gains by doing a like-kind exchange. Or you may be able to deduct a loss, but only to the extent attributable to a decline in value after the conversion.